Comparables company analysis or trading comps is one of the most widely used valuation methods

by bankers. It provides a market benchmark against which a banker can establish vlauation for a
private company or analyize a value of a public company. It is based upon the premise that similar
companies provide a highly relevant reference point for valuation because they share similar
business and financial characteristics.

There are 5 main steps involved in the comparables analysis and those are:

1) Select the universe of comparable companies

2) Locate neccessary financial info
3) Spread the key ratiso
4) Benchmark companies against one another
5) Determine valuation

- Select the universe of comps and spread key ratios

Study the target - Firstly, we need to thoroughly analyze our target and determine its main
business and financial characteristics. For public companies there are a lot of sources we can
use such as SEC filings, 10K, 10Qs, consensus estimates, equity research, investor
presentation, corporate website etc, while for the private companies we are somewhat more
limited, but there are corporate websites, trade journals, sector research reports.

Determine key business and financila characteristics:

Business characteristics – Sector, Products and Services, Customers and End markets,
Distribution Channels, and geography
Financial – size, profitability, growth profile, credit profile, return on investment

Sector refers to the industry or markets in which the company generally operates. To be
more specific we can divide a broader sector to some smaller sub-sectors to more closely
match peers with the target company.

Products and services are key elements of any business. Typically, companies which perform
similar services or sell similar products serve as good comparables.

Companies which share similar group of customers and have same end markets are often
used as comparable companies. End markets refer to the broad underlying markets in which
the company sells its products.

Distribution channels are channels thorugh which a service or a product gets from a company
to acustomer. As such they are key performance drivers.

And of course, geography is really improtant. Macroeconomic conditions, political risks,

currency risks all affect the valuation of a business and the companies which share those
characteristics serve as the best comparables.

Companies with similar size are likely to have more similar multiples than companies with
size discrepancies. This is often because larger firms tend to be more secure and investors
are willing to pay a premium for that. The key metrics that are used for evaluating the size of
the company are: equity value and enterprise value; and key financial data: sales, gross
profit, ebitda, ebit, and net income)

Profitability measures the company’s ability to turn sales into profit. Most commonly used
ratios: gross margin, ebitda margin, ebit margin, net income margin (affected by capital
structure, companies might have similar ebitda/ebit margins and very different net income
margins)

Growth profile – most commonly tracked metric is EPS – historical values are taken to
analyze average growth and projections can also be found in consensus estimates/equity
researches.

Return on investment – measures a company’s ability to provide earnings (or returns) to its
capital providers ROIC, ROE, ROA and dividend yield

Credit profile measures the company’s ability to repay its liabilites in a timely manner. It
measures creditworthiness as borrower. Includes: leverage ratio = debt/ebitda, debt to total
capitalization, and coverage ratios such as ebitda/interest expense. Also a credit rating.

Once he completes the analysis, the banker uses the results to find the closest comparable
companies to the target company.

Benchmark companies

In order to truly assess the target’s relative strength, a banker needs to really understand
each comparable’s story. First we benchmark the key ratios, and then the trading multiples
and derive ranges for valuation.

Pros

Market based
Qucik
Relativity easily measurable
Current

Cons
Market based
Disconnect from Cash flows analysis based on the current macroeconomic conditions and
perception of the market towards similar companies might be disconnected from the
valuation implied by DCF which calculates intrinsic value of the company
Absence of comps
Company specific issues

Sector speciofic multiples p. 49